WEAKNESSES

Small, open economy vulnerable to external shocks given the dependence on copper and Chinese demand

Exposure to climate and earthquake risks

Weak budgetary resources: 20% of GDP

Inadequate research and innovation

Vulnerability of the road network and electricity grid; high energy price / stretched country

Income disparity and poor education system

Risk assessment

Still fair, but decelerating, growth in 2019

After having reported an average annual growth rate of only 1.7% through the 2014/17 period, GDP observed a sharp improvement in 2018. The stronger performance was mainly underpinned by relatively higher copper prices and the rebound in business confidence since the election of the business-friendly President Sebastián Piñera. These factors also contributed to a rebound in investments after four consecutive years of contraction. A low inflation level and an accommodative monetary policy have also contributed to boosting household consumption. In 2019, while investments should remain robust, household consumption could observe some deceleration. This is in part due to the side effects of inflation moving back to the 3% target (driven by a low comparison base and by recent exchange rate depreciation), and the central bank implementing a tightening monetary cycle (a first hike was announced in end October 2018: 25 basis points to 2.75%). Moreover, employment figures have disappointed in light of a growing labour force. Downside risk to the activity outlook comes mainly from an escalation of the US-China trade war, which could hurt global growth as well as copper prices. China and the United States represent the main destinations of Chile’s exports, representing 28% and 14% respectively of total exports in 2017. Additionally, copper accounts for 10% of the country’s GDP, 25% of its fiscal revenues, and 50% of its export earnings.

Two deficits expected to remain moderate and manageable

The current account deficit widened in 2018. The relatively weaker outcome is mainly explained by the trade balance, as imports (driven by higher energy prices) rose at a faster pace than exports (copper prices lost momentum along the year due to the global trade protectionist rhetoric). As copper and energy prices should remain at similar levels in 2019, no big changes in balance are expected. It is worth noting that despite the relatively higher current account deficit, foreign direct investments are enough to ensure the external balance. In addition, the country holds foreign exchange reserves worth roughly 14% of GDP, or seven months of import coverage, in addition to sovereign wealth funds estimated at around 9% of GDP. However, Chile is not totally immune to shifts in foreign investors’ mood towards emerging economies. The country holds an external debt of 60% of its GDP, over 70% of which is owed by the private sector (21% banks and financial institutions, 79% non-financial institutions). In late 2018, Congress approved a general banking law to move towards the Basel III standard. Regarding the fiscal balance, the robust initial position of the public finances has helped mitigate the negative impact of sluggish activity in 2014/17. In the wake of rebounding activity, the government was able to reduce the fiscal deficit in 2018. In 2019, fiscal consolidation is expected to gain further momentum, in line with the goal of reducing the structural deficit by 0.2 percentage point per year, until reaching a deficit of 1% in 2022.

With no majority, the government is trying to pass more reforms

The incumbent President Sebastián Piñera from the centre-right Chile Vamos alliance took office in March 2018. Mr Piñera was elected thanks to his pledges to reduce mining regulations, to make adjustments to President Michelle Bachelet’s (2014/18) labour reform, to simplify tax rules, to reduce some corporate taxes, and to narrow the fiscal deficit. Nonetheless, neither his party nor the main opposition holds a congressional majority (hence the necessity to build consensus to pass reforms), and he will struggle to find support among the opposition for measures such as reducing labour unions’ strength and mining regulations.

In early June 2018, Mr Piñera announced that he would not cut the corporate tax rate that Mr Bachelet’s government raised to 27% – a step back on a campaign promise. He argued that maintaining the rate would help solve the fiscal imbalance and fund social reforms needed for the education, health, and pension systems. Subsequently, at the end of October 2018, Mr Piñera presented a pension reform. The country holds a highly privatised pension system that was introduced in the 1980s under the Pinochet dictatorship. Nevertheless, over the years, the combination of an ageing population, insufficient pension contribution rates, poor-paying jobs and high unemployment rates have contributed to low pay-outs. Although the proposal goes in direction of the opposition in some areas, the government might need to make some adjustments to the initial proposal in order to pass the bill through Congress.

Last update: February 2019

Payment

Promissory notes, cheques and bills of exchange are frequently used for commercial transactions in Chile. In an event of default, it offers creditors some safeguards, including access to the summary proceeding (Juicio Ejecutivo). Under a juicio ejecutivo, based on his appraisal of the documents submitted, a first instance judge (Juzgado Civil) may order a debtor to pay at the moment of the notification – if the debtor fails to do so, his property will be seized. These documents may need to be validated by court before becoming legally enforceable.

Bills of exchange that are guaranteed by a bank are widely accepted, though somewhat difficult to obtain. They limit the risk of payment default by offering creditor additional recourse to the endorser of the bill.

Cheques, which are used more often than bills of exchange or promissory notes, offer similar legal safeguards under Juicio Ejecutivo in the event of unpaid for a cause (protesto), uncovered cheques, or closed accounts. Checks and the other mentioned documents, if not paid on time, can be reported to a Credit Report Company called Boletin Comercial.

The same is true of the promissory note (pagaré), which − like bills of exchange and cheques – is an instrument enforceable by law and, when unpaid, may also be recorded at Boletín Comercial (see below). The promissory note needs to be validated (protestada) by a public notary or in a judicial trial.

The Boletín Comercial is a company dedicated to conducting financial risk analysis. It provides to other information companies (such as Dicom, SIISA) information about the debts registered at national level for all kind of debtors. Boletín Comercial is the official and most important company, on this matter, at national level under the authority of the Santiago Chamber of Commerce (Cámara de Comercio de Santiago). Both, Companies and individuals, can be registered as debtors in the Boletin Comercial. The register provides key financial information that can be consulted by anyone who is interested in obtaining a picture of the financial behaviour of a Company or individual.

Electronic transfers via the SWIFT network, widely used by Chilean banks, are a quick, fairly reliable, and cheap instrument.

Debt Collection

Amicable phase

Collection begins with an amicable collection process where parties can agree on a payment settlement or other payment plan. The length of this amicable phase depends on the predefined term of the documents supporting the debt (cheque, invoice, promissory note, bill of exchange). A formal notice is sent by a recorded delivery letter inviting the debtor to pay.

If the parties did not include any specific clauses in the commercial contract, the applicable rate for delays on the payment is the conventional interest rate as defined by the central bank of Chile on a periodical basis.

Ordinary proceedings

When a settlement agreement cannot be reached with the debtor, the creditor will initiate a legal collection process ruled by local civil procedure.

Aside from the Juicio Ejecutivo creditors who are unable to settle with their debtors out of court may enforce their right to payment through the corresponding legal action ruled by the civil procedure. According to the local procedural laws, there are two kinds of judicial collection procedures; i), ordinary proceedings (Juicio Ordinario); ii) and abbreviated proceeding (Juicio Sumario) depending on the value of the sued amount and the type of documents that support the debt.

The claimant needs to explain the basis for their legal action and enclose all supporting documents (original copies) and evidence. After the first presentation in court, the judge will decide whether the legal action has basis or not. If the judge considers there are enough arguments and evidence, he will give course to the process.

Debtors can dispute ruling with motivated arguments that law contains at the Código de Procedimiento Civil (Civil Procedure Code, defences) such as payment of debt, prescription, compensation, etc. Judges will consider these arguments and will accept or reject the defence. It is important to note that, while the defences of the debtor are discussed by the parties in the trial, the steps relating to seizure of assets are not stayed. The idea of this is that the debtor cannot delay the procedure unnecessarily.

Trials can last from six months up to two years, depending on the document, the debtor’s defence, and if an appeal is filed following the initial judgement.

Enforcement of a Legal Decision

Domestic judgments are enforceable when all appeals have been exhausted. If the debtor fails to comply with the decision, the court can order an auction of the debtor’s assets. Collection from a third party owing to the debtor is not possible.

Foreign judgments may be enforced if the Supreme Court validates these through an exequatur proceeding. Chilean law only recognises foreign judgements on a reciprocity basis: the issuing country must have an agreement with Chile regarding recognition and enforcement of legal decisions. Proceedings can last from between one to two years and the amounts to recover decrease because it is not possible to request the restitution of taxes paid to the treasury, which national companies can require.

Insolvency Proceedings

Out-of court proceedings

Extra-judicial reorganization

The 2014 bankruptcy law recognizes agreements between creditors and debtors that are reached outside of a bankruptcy proceeding, whereby a court approves the agreement that was developed outside of the bankruptcy court. In order to be approved, two or more creditors whose claims represent at least 75% of the total claims corresponding to their respective group must accept the plan.

Chilean law distinguishes different categories of creditors during a bankruptcy process, e.g. employees owned money, creditors that have a mortgage (usually banks), etc. Creditors in these categories have preference for payment over others. If creditors do not meet the criteria to be part of these categories, they do not receive have any kind of preference for payment.

While considering the approval of said plan, the court stays the procedure and the legal actions against the debtor. However, during this time also, the debtor is prohibited from disposing of any of its assets. After approval, the plan has the same effect as a judicial reorganization.

Restructuring proceedings

Restructuring processes carried out without a formal bankruptcy process are also carried out through a court trial at the request of the creditor(s). In the event that the debtor is not able to reorganize his debt through any agreement or negotiation, creditors may request the liquidation of the company.

Judicial reorganization

These agreements are more formal than extra-judicial agreements, and can only be filed by debtors, as they have to declare their insolvency to the court. The proceedings apply to both secured and unsecured creditors. Once debtors enter the judicial reorganization process, they must subsequently propose a reorganization plan, which requires the approval of at least two thirds of the total number of creditors.

Liquidation

Liquidation is organized through a single procedure initiated upon demand of the debtor or creditors. The latter can file for bankruptcy when a debtor defaults without appointing an administrator for its business. Once bankruptcy is declared, a trustee is given responsibility for the debtors’ business and assets.